Will rates go up or won’t they? The Fed has been itching to put up rates for months and months now, following the solitary rise it managed to force through at the end of last year. That in turn was the first rise since 2006, and the central banking fraternity in the US clearly feels that enough is enough.
The markets sense it too, although the commentators might not like it and the inevitable slide in equities when the rate rise does come will inevitably be met with negative headlines around the world.
The headlines might be better written to concentrate on the concurrent stabilisation in the value of cash.
But that’s all still to come, and it’s still by no means certain that the Fed is going to get there any time soon.
Commentators keep flip-flopping on this issue, and as markets hit new highs, it’s clear that the hot money is still betting that rates will stay low.
Current consensus is that there’s a 22% probability of a rise next week, and a larger 57% probability of a rise in December.
The real question though is whether that 57% number is simply a reflection of the Fed’s well-known and well publicised desire to raise rates, and that pushing the date for that raise out to December puts it far enough in the future to allow for Fed’s desire without actually impacting markets in the immediate term.
Who knows what the betting will look like in late November, but it might not be a surprise if by then markets were expecting rates to stay flat in the December FOMC, but to rise some way out into 2017.
Certainly, certain US data has been looking distinctly soft of late. Although the economy remains in growth, the rate of growth has been trending lower since the second quarter of 2015, according to analysis by CMC Markets.
That’s certainly not an economic context in which anyone really should be rushing to put up rates, no matter how long they’ve been put on hold, especially since inflation remains weak. No need for a brake, no need for a rate rise.
Fed committee member Lael Brainard seems to be minded to take this line. She has consistently voted against any increase and looks set to do so again. She has counselled “prudence” in opposition to fellow committee members Dennis Lockhart and Eric Rosengren, on the basis that growth is only anaemic at best.
If growth continues to tail off, then the case for a rise will weaken rather than strengthen, so it may be a question of now or never.
But in any event how much this all matters for the mining and metals complex is an open question. The conventional thinking is that a rate rise, when it comes, will lead to a fall in the gold price.
But expertise on this is thinner on the ground than might be expected. There’s only actually been one rate rise in the last ten years, and many of the variables that were operative then have changed in nature now.
The big one, of course is China. China was a factor in 2006 of course, but in terms of influencing FOMC policy decisions its influence was still bedding down.
Now the Chinese economy is established as a major factor in influencing global growth and although rate decisions by the Fed may impact the pricing of commodities to some extent since all are priced in dollars, the decisions of Chinese purchasing managers are becoming more influential by the day.
But what of gold, the pure proxy currency?
It’s worth remembering that when the post-Lehman quantitative easing programmes were underway they operated their effect on gold became less and less pronounced.
Gold did rocket on QE1, but it already had significant momentum behind it. It strengthened further on QE2. But come QE3 and the reaction was fairly muted.
So it may be that the rate rise that’s now supposed to put a brake on gold will have more of a temporary dampening effect. It will take more than one rate rise to turn gold back now.
And if those rises come as infrequently as they’ve come in recent years, the cumulative nature of the effect may be lost altogether.
Which all raises the tantalising and potentially paradoxical prospect that if he Fed raises rates the market will sense a weakness in the bear case for gold and gold won’t go down at all.